Why We Think Auto Sales Will Continue To Be Strong

 |  Includes: F, GM, NSANY, TM, VLKAY
by: Valuentum

U.S. auto sales remained strong across all major auto manufacturers in June. We expect this trend to continue for the remainder of 2012 and into 2013. Though profitability at a few auto makers remains pressured by weakness around the rest of the globe, the U.S. continues to shine.

Our favorite auto maker, Ford (NYSE:F), reported 7% sales growth in June compared to the same month of 2011 versus consensus expectations of 4.4% growth. Likely as a result of lower fuel prices, sales of sport utility vehicles outpaced other segments, with sales increasing 25.4% compared to the same month a year ago. The F-series also experienced strong growth, with sales increasing 10.9% year-over-year. Even Lincoln, which has been weak this year, saw sales increase 2.5%. We're big fans of Ford's valuation, as we think shares are worth roughly twice where they are currently trading. We make available our valuation reports here.

General Motors (NYSE:GM), another OEM we think is undervalued, saw sales increase 16% in June, compared to consensus estimates of 7.7% growth. Buick and Cadillac, which have been somewhat weak in 2012, saw sales grow 27% and 12%, respectively. GM still has one of the worst operating margins in the space. However, over the next two years, 70% of GM nameplates will undergo redesigns, and this could lead to substantial upside potential. The firm predicts the SAAR to be 14-14.5 million units for the year.

Toyota (NYSE:TM) saw sales grow 60%, versus an expectation of 66%, though this outsize growth was mainly a result of the Japanese supply-chain disruption that led to a massive undersupply in the U.S. in June of last year. Sales actually fell slightly sequentially, and we think the firm is losing some share in the U.S. market. On the other hand, Volkswagen (OTCPK:VLKAY) sales grew 34.2% in the month of June. Volkswagen noted that this is its strongest first half results since 1973. Audi is quickly becoming among the most popular luxury vehicle brands in the U.S. Nissan (OTCPK:NSANY) and Chrysler also experienced fantastic results in June. Nissan saw sales increase 28%, and Chrysler saw growth of around 20%. Industry-wide pricing also grew 2.9% for the month.

June results among all of the automakers only strengthen our conviction in the U.S. auto recovery. We expect the auto refresh cycle still has plenty of room to run, as the average age of vehicles on the road continues to slowly grow and repairs and parts become more costly. Ford is our favorite name in the space as we hold it in our Best Ideas portfolio (please view links on our sidebar for more info), but we also think GM is now undervalued at current levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: F is included in our Best Ideas portfolio.